30 December 2009

[S]cientists are dull mainly because the progressive increase in the requirements for long-term plodding perseverance and social inoffensiveness has the effect of deterring, driving-out and failing to reward too many smart and creative potential scientists before they ever get a chance to engage in independent research.

I think the same could be said of policymakers and public servants and for broadly similar reasons. Any large organization is going to rely more on willingness to conform to the organization's rules and processes than on the contribution an individual makes to a particular outcome. An individual's conformity to procedures is much easier to measure than his or her contribution to a possibly nebulous or undefined outcome.

In my book about Social Policy Bonds I explain how attempts in the 1980s to reform New Zealand's public service faltered over the question of how to measure departmental performance. At the outset of the reform programme, government departments had been envisaged as achieving specific outcomes, but instead outputs became the measure by which departments' performance is judged. Why did that happen?

One reason is said to be the self-interest of ministers and public servants, who are unwilling to be scrutinised. Another is that while the supply of outputs can be directly attributed to departments performance, outcomes can be influenced by factors beyond their control. As one commentator put it: outcomes are externalities in two-party relationships; therefore it is exceedingly difficult to assign responsibility for them. Market solutions for social and environmental problems: Social Policy Bonds

So it looks very much as though the perceived need to assign responsibility in effect hijacked more thoroughgoing reform. The perception of such a need arises because the players - those whose responsibility is to be assigned - are known in advance and are assumed constant. And who are these players? Why, they are the existing government departments, of course. In effect the New Zealand reforms have subordinated results to an assumed need to assign responsibility, which in turn seems to be driven by existing institutional structures and their wish to perpetuate their own existence and degree of control. It's a potentially disastrous failing: leading to a divergence of the objectives of departments in particular and government in general from the people whom they are supposed to serve. The results, throughout the democratic countries, are becoming all too clear: a widespread disenchantment with conventional politics, a growing cynicism and despair over government ever being able to deliver what ordinary people want and need.

24 December 2009

Sterile life-prolongation, as against creative destruction. It's what you get when major funding decisions are made on the basis of who you are (or how much you give to political parties) rather than what you achieve. And, increasingly, it's the regime under which we live. It's the way our politicians operate, in conjunction with their friends and paymasters in the large organizations, whether they be government agencies, corporations or trade unions. It's the system that brought the Soviet Union to collapse and it's well on the way to securing the same destiny for the west. (See here for a blog making this comparison.)

Creative destruction means that unsuccessful businesses fail. In social policy it should mean the same for unsuccessful programmes. But it rarely does; government too often acts as a monopoly supplier of social and (increasingly) environmental services. As tax revenues rise, government tends to crowd out alternative ways of doing things. Take scientific research, which is now essentially a nationalised industry. In itself, this need be no bad thing, but the way government typically allocates funding is always going to be determined by politics rather than results. Funding is to institutions, rather than outcomes. This leads to idiocies like the use of citation indices to evaluate research.

What's needed is a more direct relationship between taxpayer funds and those outcomes that are meaningful to ordinary people. Government can -and indeed, should - be the articulator of society's goals, and it has a vital role in raising the revenue needed to achieve them. But like all big organizations, and like monopolies in particular, it doesn't work well when creative destruction is required. It's too big to adapt quickly; it's too slow to terminate failures. It doesn't like diversity, and it doesn't do creative destruction. No single organization can. And we need diversity and adaptiveness in complex, uncertain ventures, especially where our scientific knowledge is growing rapidly. I've written numerous times about the need for a mosaic of different approaches to tackle problems like climate change or war. Such problems just cannot be solved by any single organization, however big and however well intentioned. Sadly, the vast majority of resources aimed at these problems is now allocated by government. Even more sadly, the failure of government to address these challenges threatens our entire species.

Social Policy Bonds would, in contrast, supply the necessary creative destruction. Projects would be appraised continuously by highly motivated actual or would-be investors in the bonds. There motivation would be pecuniary, of course, but through a bond regime it would be channelled to serve the interests of society as a whole. Funding would be allocated entirely according to results, as anticipated by a plurality of interests. Sterile life-prolongation (a la Kyoto, for instance) would surrender to creative destruction.

That refers to the federal US highway system, and works out at about 35 percent of the total. This amount excludes the costs of accidents, air and noise pollution, and the impacts on wildlife. It appears that state and municipal roads in the US are even more heavily subsidised.

Social Policy Bonds would mean contracting out the achievement of social goals to the private sector. Two crucial points relevant to roading are: (1) clarifying whether cheap, easy transport is an end in itself or a means to ends that would be better targeted more direction, and (2) transparency, which in this context is about making it clear to people where there taxes are going. In short, it's quite possible that people are willing to pay for cheap roading, even if many of us are nonusers. We might even be willing to shore up reckless banking behaviour, or massive agribusiness corporations, car and truck manufacturers and all the rest. But we should be given the option. The current system doesn't allow that: by emphasising process, institutional structures and spending, regulations and legalisms, it tends to exclude ordinary people from policymaking. In contrast, Social Policy Bonds would have transparency built in. A more ethical, as well as more efficient, way of achieving social goals, I think.

13 December 2009

Society's size and complexity mean that numbers are going to have to be used to help determine policy. Numbers inevitably distort, but if things aren't measured they tend to be ignored at the policy level. We want numbers, ideally, to represent human wellbeing - which immediately raises the question of whether or how animal and plant life are to be weighted when it comes to setting policy goals. There are many other questions, but where numbers correlate strongly with what we want to achieve, there's no objection to targeting them, a la Social Policy Bonds, as part of a wider political process. The key is to ensure that the correlation remains strong over the target range. For instance, the correlations between, say, educational level, household income, or longevity, and wellbeing are strong at the lowest levels of all these variables, but become much more tenuous as we move into tertiary education, higher incomes or age ranges.

If Social Policy Bonds were ever to be issued, they would benefit from the work already being done to quantify even such complicated things as human wellbeing - see, for instance, the Human Development Index. Now it appears that people are trying to aggregate and quantify climate change. A group called the International Geosphere-Biosphere programme has launched the 'IGBP Climate-Change Index'. This and the HDI would need refinement before they could be explicitly targeted, and there would always be debate about what they should include and relative weightings.

Even then, they might not be perfect as policy instruments. But what is the alternative? In the absence of explicit targets that are meaningful to ordinary people we are seeing the good intentions of politicians being almost entirely hi-jacked by the short-term financial interests of rich corporations. If that sounds far-fetched, you have only to look at the levels and persistence of government (taxpayer) support for the banks.

We the paying public can't do anything much except admit defeat and settle back for the next set of bills. In the meantime, perhaps we should try and think of a name for the new economic system, which certainly isn't capitalism: that, remember, is all about 'creative destruction', and the freedom to fail. That's exactly what we don't have. The most accurate term would probably be 'bankocracy'. Bankocracy, John Lanchester, 'London Review of Books', 5 November

12 December 2009

There is overwhelming, but not quite conclusive, evidence that the global climate is changing. That said, scientists and policymakers are divided as to (a) how fast climate is changing, (b) what is causing it to change, (c) the likely effects of climate change, (d) how much we can do about it, and (e) how much we should do about it. Despite these uncertainties, climate change has the potential to inflict serious harm on large populations, so there is a strong argument for doing what we can to prevent it or minimise its adverse effects. The December 1997 Kyoto treaty required developed countries to bind themselves internationally to numerical targets. If there is any universal consensus about Kyoto it is that, for all the bluster and bureaucracy, its impact on the climate will be so small as to be unnoticeable.

Gaming the system

The forthcoming climate change summit in Copenhagen, if deemed successful, will be more of the same. At best we can look forward to minimal reductions in emissions; undetectable effects on the climate; and the squandering of billions of dollars on wasteful, corrupt schemes all over the world. The big beneficiaries will be third-world dictators, Swiss bankers, and the burgeoning bureaucracies at national and supra-national level who will be charged with administering and ensuring compliance with whatever emission reduction regime is agreed. This is not cynicism, it’s realism. The manoeuvrings of the various interest - fossil fuel extractors and users, as well as farmers, forest owners, the auto industry, politicians and officials - tell us all we need to know about where human ingenuity is going: in bickering, lobbying in defence of vested interests, and competing with other interest groups for subsidies. Gaming the system in other words. One example: US companies and interest groups involved with climate change hired 2430 lobbyists just last year, while 50 of the biggest US electric utilities spent $51 million on lobbyists in just six months.

They are all reacting perfectly rationally to the incentives on offer, and those incentives are perverse. They have little to do with actually solving meaningful problems, and far more to do with the prime, over-arching goal of all institutions: that of self-perpetuation – even if the rest of the world has to undergo catastrophic climate change. Under Kyoto-Copenhagen that’s where humanity’s boundless energy and ingenuity will be diverted and that’s why it’s not going to work.

Rewarding achievers

Here’s a different approach: agree on the outcome we want to achieve, and reward people for achieving it. The outcome we should be targeting is some agreed, meaningful definition of climate stability, which should include indicators of human, animal and plant wellbeing as well as climatic variables and the rate of change of those variables. Targeting climate stability means that we don’t prejudge the best way of achieving it. This is, in my view, the most glaring flaw of the Kyoto-Copenhagen approach: it assumes that the best way of tackling climate change is to reduce anthropogenic greenhouse gas emissions. There is no evidence for this, even though the evidence that links such emissions to climate change appears convincing – with our current knowledge.

But our knowledge is rapidly expanding. We are constantly discovering more about the links between greenhouse gas emissions and the climate, and about ways in which we can prevent or minimise the impacts of climate change. Kyoto is a single, one-size-fits-all, top down, supposed solution to the climate change problem, and it’s based on science fossilised in the last 20 years. But the climate change problem may be so huge and so urgent that we need instead a mosaic of diverse approaches that can adapt to our rapidly changing knowledge and rapidly changing circumstances.

We also need to enlarge and motivate the pool of people prepared to do something to tackle climate change. Currently there is probably more human ingenuity devoted to marketing new brands of dog food or securing the bonuses of failed bankers than to finding ways of preventing or mitigating climate change. The fact is that the rewards to a successful pet food campaign manager or a reckless banker can be in the millions of dollars, while someone trying to generate new ideas for tackling climate change that don’t fit in with the Kyoto paradigm will have difficulty getting attention, let alone adequate funding.

We need to target a stable climate however that goal is to be achieved. We cannot afford to let the bureaucrats who run the Kyoto-Copenhagen industry dictate the pattern of the world climate: we cannot afford the waste and inefficiency of brainpower that people will expend on gaming the current system.

Climate Stability Bonds

It is for all these reasons that I believe Climate Stability Bonds would be an improvement over Kyoto. Climate Stability Bonds would be backed by the world’s governments. They would be redeemable once a specified climate stability goal had been achieved and sustained. They would be freely tradable and their value would rise or fall as the targeted goal become more or less likely to be achieved. The goal could be specified as a combination of climate and other indicators. And crucially, Climate Stability Bonds would not prejudge the best ways of achieving our goal. They would reward the achievement of a sustained period of climate stability, however it is achieved. Investors in the bonds would have incentives to respond quickly, appropriately and with maximum efficiency to new knowledge about what is causing climate change and to new ways of dealing with it. Governments would be the ultimate source of finance for achieving climate stability, but the private sector would allocate society’s scarce resources. Investors in Climate Stability Bonds would have exactly the same interest as society: achieving climate stability and the lowest cost.

A Climate Stability Bond regime would express its aims in terms that people can understand. Its explicit goal would be climate stability. If people understand what a policy is all about, they can participate more in its development, refinement and implementation. This matters hugely when, as with climate change, government will probably have to encourage us to rein in activities to which we have become accustomed. Kyoto discourages buy-in because it is focused entirely on one single policy: the cutting back of net anthropogenic greenhouse gas emissions which, at best, will do little to prevent climate change and despite being ineffectual will impose heavy, and up-front, financial costs.

There is still some legitimate doubt about just how big a threat climate change represents. Here Climate Stability Bonds have another huge advantage: because they would be auctioned on the open market, it would be bidders for the bonds, rather than governments, who would have to take a position on just how much will have to be spent to achieve climate stability.

To summarise: Climate Stability Bonds have a comprehensible, meaningful goal: the achievement of climate stability. They would channel the market’s incentives and efficiencies into the solution of our most urgent environmental problem, at least cost to society. And with their focus on a targeted outcome, rather than a supposed means of getting there, they would also encourage greater public participation and buy-in to the solutions they generate. We need a widely supported, coherent, and efficient response to climate change. Climate Stability Bonds have all those features. Kyoto, and whatever will be agreed at Copenhagen, have none.

06 December 2009

The top bankers and businessmen of the UK might have proved themselves worse than useless. But an economy managed by state bureaucrats will be no better. ... We are left with the prospect of the worst of all worlds – a state-subsidised capitalist economy, but one denuded of the dynamic side of capitalism that Karl Marx long ago identified alongside the system’s destructive aspects, and which has driven economic growth through the modern age. What happens if the state turns off the ‘life support’?, 25 November

All the evidence bears out Mr Hume. Government intervention has generally started out with the best of intentions: to maintain employment, to prop up allegedly strategic industries (like car assembly or industrial agriculture), and before long it becomes indispensable to its favoured sectors. Taxpayer support is capitalised into asset values, making its withdrawal problematic. Sectors use their status and subsidies to bias the international trading and domestic regulatory environments in their favour, and to finance lobbyists whose job is to maintain their vested interest. State supoprt, like a drug habit, is easy to start, difficult to stop. And now it's propping up not just individual sectors, but our entire financial system. The result will be ossification, the Sovietization of our economies and, inevitably, collapse. If that sounds far-fetched, consider that, government accounted for two-thirds of the Welsh economy - before the financial crisis. (And read about some of the social implications here.)

Difficult to imagine, but it gets worse. We are now looking to manage our global environment in the same manner: that is, by setting irrelevant targets, imposing them heavy-handedly, pre-supposing that government knows what's best, and suppressing alternative solutions. I refer of course to Kyoto-Copenhagen, where government is using fossilised science to tackle one of the alleged causes of climate change. Spectacularly expensive, politically divisive, bureaucratically intrusive - Kyoto-Copenhagen will Sovietize the entire planet. The end result is absolutely foreseeable: runaway climate change, widespread poverty and an ever more entrenched and brutal bureaucracy telling the rest of us us what to do.

The debate is so debased and politicised that anybody reading the above will think I don't believe anthropogenic climate change is happening, or that government should just sit back and do nothing. But it's just the opposite: I think climate change is far too serious to be left to the same government mentality that has given us, for example, an agriculture sector absolutely dependent on imported oil, with its denuded landscape, devastated wildlife, and polluted waterways. Government does have an indispensable role to play in ensuring climate stability: it can define our climate goals, articulating society's wishes. It can raise revenue to reward the people to help achieve that goal. But, crucially, it must stand back from dictating how that goal shall be achieved (see here for my suggestion).

We need diverse, adaptive approaches, and we need them urgently. Unfortunately - tragically - government doesn't do diversity nor does it have the ability to adapt quickly to changing circumstances.

....the above email is simply jaw-dropping. If the climate scientists cannot tell if a particular remedy is working, it means that they aren’t exactly sure how the climate would have evolved in the absence of such a remedy. In other words, Trenberth at least is admitting that he is not at all confident in the precise, quantitative predictions that the alarmists are citing as proof of the need for immediate government intervention. And this expression of doubt wasn’t from the distant past: Trenberth sent the above email in October of this year!

Precisely so: there's little point on embarking on policies if we cannot, or don't bother to, measure how effective they are. Sadly, such fecklessness is typical of most government interventions (see this paper by Stephen van Evera). It's irresponsible, wasteful, and often corrupt. It's also quite normal and generally accepted, and Kyoto-Copenhagen is simply an extrapolation of it onto a global scale.

Which is why I advocate Climate Stability Bonds, which would inextricably bind all policies, activities and projects to objectively verifiable targets and indicators. Governments would not have to accept models of climate sensitivity - or indeed any other climate data - from scientists as true or false: under a bond regime assessment of that information would be done by would-be investors in the bonds. These people, or institutions, would have incentives to respond rapidly to our rapidly expanding scientific knowledge - unlike the Kyoto-Copenhagen approach, which assumes that we already know all the important causes and consequences of climate change.

Quantitative targets would be built into the Climate Stability Bond approach; but the beauty of the bonds is that they don't assume fixed relationships between interventions (cutting greenhouse gas emissions, for instance) and how climate will respond. That would be up to bondholders to work out themselves; at their own risk, and in ways that respond continually to new information. I think that's far preferable to whatever agreement will come out of Copenhagen. You can be sure that if there is such an agreement, the single impact that will be monitored assiduously and unambigously will not be that on climate, but rather the money flows from rich to poor countries.

30 November 2009

The warming effect of carbon dioxide has been known since at least the 1900s, and that of ozone since the 1970s, but the importance of black carbon was discovered only recently. ... no on knows exactly how much warming [black carbon] causes, but even the most conservative estimates indicate a nontrivial impact. The other climate changers: why black carbon and ozone also matter, HessicaWallack and VeerabhadranRamanathan, 'Foreign Affairs', Sept/Oct 2009 (subscription, but see here)

Black carbon is a widespread form of particulate air pollution and mostly originates from the burning of biomass or fossil fuels. But the important phrase is 'no one knows'. It is that phrase that exposes the flaw in the entire Kyoto-Copenhagen approach to climate change. Even if titanic efforts to reduce carbon dioxide emissions are made, at great social, financial and political cost, no one knows if they'll have any effect. Perhaps all such efforts will be swamped by any of the myriad other variables about which no one knows.

It's imperative that we shift from trying to work out the causes of climate change and acting on those, to an approach that targets the outcome we want to achieve and rewards people for doing so. We need an approach that will respond quickly to our rapidly expanding, but still deficient, scientific knowledge, and to new events. We need an array of adaptive, diverse approaches. Kyoto-Copenhagen is none of these things. It's deeply flawed and it's going to fail, however much money is thrown at it.

I've been talking and writing about Climate Stability Bonds for many years now, and will continue to do so until I see a better solution. It's a bit disheartening that the bonds' outcome-based approach is not generating any interest at political level, but I cannot see any better solution either to climate change or to any of our other social and environmental problems whose complexity will defeat any approach based, like Kyoto, on deficient, fossilised, information.

27 November 2009

At the end of a Shakespeare tragedy the stage is strewn with dead bodies, and maybe there's some justice hovering high above. A Chekhov tragedy, on the other hand, ends with everybody disillusioned, embittered, heartbroken, disappointed, absolutely shattered, but still alive. And I want a Chekhovian resolution, not a Shakespearean one, for the Israeli-Palestinian tragedy. Source

We might do better to target such a basic goal - human life - than strive for fairness and justice, when it comes to making policy. This certainly applies to the Arab/Israeli conflict (see my essay on applying the Social Policy Bond principle to the Middle East). Justice and fairness can be sought for, but they must overlie the even more fundamental goal of human survival.

The same applies to climate change: arguments about which countries are most responsible for the build-up of greenhouse gases in the atmosphere may be necessary, but they should not impede the more fundamental goals of reducing the rate of climate change and its impacts. Similarly with other global threats, such as nuclear proliferation. More than all else that we'd wish to see in these policy areas is human survival.

Thankfully, the Social Policy Bond mechanism allows us to fold such desirable goals as justice and fairness into that over-arching objective. Social Policy Bonds targeting world peace, say, would not discourage the pursuit of justice; they would even encourage it when doing so makes human survival more likely. But they could also introduce an element of unfairness, for the sake of the greater good. Holders of bonds targeting peace would have every incentive, for example, to bribe people espousing inflammatory views to keep quiet, or to take an indefinite vacation at the golfing resort of their choice. It might not be fair; it might lead to gaming of the system; but the benefits to everyone else would be huge. We shouldn't forget either that there's plenty of such unfairness in the current system. The difference - and it's crucial - is that currently it just as often acts to worsen the chances of human survival as to enhance them.

24 November 2009

It's a while since I suggested that one way of bringing about peace in the Middle East might be for investors in Middle East Peace Bonds to subsidise intermarriage. Happily, it seems that that particular suggestion looks like being implemented in Iraq:

Iraqi Vice President Tariqal-Hashemi has an unusual proposal to mend some of Iraq's sectarian wounds: He offers mixed couples a $2,000 "gift" if they get married.USA Today 24 November

23 November 2009

Writing about the collapse of professional journalism, Mark Bowden says:

Work formerly done by reporters and [TV] producers is now routinely performed by political operatives and amateur ideologues of one stripe or another, whose goal is not to educate the public but to win. This is not a trend likely to change.The story behind the story, Mark Bowden, 'the Atlantic', October

Society is complex and so is policymaking. Ideology simplifies the otherwise impossible process of relating a social problem to its causes. But it's necessarily a distortion of reality; we are in an era now where the ideologues don't communicate with each other. Take any issue - abortion, smoking, healthcare, capital punishment, climate change... - there is plenty of debate, but less and less communication going on. Vested interests fill the gap between complex problems and ordinary people's understanding of them. As Mr Bowden puts it 'the quest for information has been superseded by the quest for ammunition'.

I think this will continue so long as society remains complex and we continue with a policymaking system that seems almost designed to translate the obscurity of the relationships between cause and effect into advantage for vested interests - generally corporations, government agencies - at the expense of the broader public. We need, I believe, to think in terms of desirable social and environmental outcomes. All activities, institutional structures and spending plans should be subordinated to outcomes. A Social Policy Bond regime is, I think, the most efficient way of targeting such outcomes. It would, in essence, contract out the achievement of social goals to those players - public or private sector- who are most efficient at achieving them. The losers? The vested interests who benefit now by gaming the current system; and that includes the ideologues on all sides.

19 November 2009

A scary article by Stuart Parkinson and Chris Langley in the New Scientist. Their organization, Scientists for Global Responsibility has looked at impact of commerce on science and technology over the past 20 years:

Over the past two decades, government policy in the US, UK and elsewhere has fundamentally altered the academic landscape in a drive for profit. ... Chemical engineering and geology are strongly linked to oil companies, for example, and it is hard to find an engineering department in the UK which does not receive funding from the arms industry. And many life sciencesdepartments have extensive links with the biotechnology and pharmaceutical industries. This creates enormous potential for conflicts of interest. ... Another cornerstone of science that is being eroded is the freedom to set the public research agenda so that it serves the public interest. Stop the sell-out, 'New Scientist', 7 November

Governments are increasingly focusing on the interests of corporations; and these are naturally enough focused on immediate financial benefit. The result? 'Environmental and social problems and 'blue sky' research commonly lose out to short-term commercial gain'.

It's the way of the world. As the gap between ordinary people and policymakers has widened, it has been filled by the corporations, and it is their interests that are best served under the current system. Sometimes these interests coincide with ours; often they don't; and far too often the two sets of interests conflict with each other. One reason for the disconnect between people and policymakers is the complexity of policy, focused as it is on legalistic debates about institutional structures and processes, spending patterns, personalities, image or ideology. Ordinary people aren't interested in such things. Above all we are concerned about outcomes - and that is about the only thing that policymakers do not target explicitly.

So instead of targeting something meaningful, like reducing the crime rate, governments make decisions about prisons, police numbers, justice procedures and the rest. Instead of targeting the rate of change of climatic variables, they target emissions of greenhouse gases, which by sheer coincidence require a large bureaucracy to oversee. And in matters such as scientific research, where government could usefully target broad social and environmental outcomes, it's the corporations and their goals that are served instead. Government just does not think in terms of outcomes, yet it is outcomes that matter most.

Social Policy Bonds would refocus our priorities onto outcomes. By relinquishing control over how things are done, governments could still set the agenda, but they would contract out the achievement of outcomes to the private sector. Under a Social Policy Bond regime, corporations would still play their part, and still have the chance of making profits, but only if they were efficient at achieving ordinary people's social and environmental goals. Government would become a matter of selecting and prioritising society's goals, and raising the revenue to achieve them. That would be healthier, in my view, than the current system, which is largely about government fulfilling the wishes of the private sector in pursuit of funds to finance re-election campaigns.

15 November 2009

The Organization for Economic Co-operation and Development reports on the subsidies, worth US$285 billion, given to OECD farmers in 2008:

Support is becoming increasingly conditioned by requirements on producers to follow certain production practices in pursuit of broader objectives, such as preservation of the environment, animal welfare or food safety. Payments involving the fulfilment of such requirements comprised 4% of [subsidies to farmers] in 1986-88, a share which had increased to 32% by 2006-08.... Agricultural Policies in OECD Countries 2009: Monitoring and Evaluation, summary (pdf)

As in agriculture, so in every other policy area: government assistance becomes conditional on doing things the way government wants you to. There are important considerations of freedom here, especially when government is becoming ever more involved in every aspect of social and economic organisation. But I am also concerned about the efficiency and risk management aspects of this sort of process-driven micro-management. They can be summarised briefly:

Government does not always know the best ways of achieving social and environmental outcomes; when it gets it wrong it does so on a big, and possibly catastrophic scale;

The ways government chooses are likely to be fossilised in time, and incapable of taking into account local circumstances; government intervention will discourage adaptive, diverse approaches, experimentation and the termination of failed approaches.

Government's edicts are also likely to be heavily influenced by considerations other than efficiency, such as the interests of large corporations.

I write at greater length on this causes and consequences of this policy monoculture in my book - see the links in the right-hand column.

13 November 2009

I'm pleased that someone else shares my belief that we can, and should aim to, end war. Gordon Fellman is Professor of Sociology at Brandeis University. Here is a link to a talk he gives entitled Ceasefire: the case for ending war. Some, though not all, of the impetus for weapons-making and war comes from financial incentives, and I think that if we supply sufficient incentives to end war it will become less the intractable feature of human life (as the ancient Greeks thought), and more another social problem that is best addressed by adaptive, diverse responses, of the sort that would be stimulated by Social Policy Bonds. See my essay Conflict Reduction Bonds: give greed a chance.

10 November 2009

Writing in History Today, Dan Jones describes England at the time of the 'summer of blood' in the year 1381. This was the Peasants' Revolt, when the lower classes, emboldened by the labour shortages that resulted from the Black Death, flexed their muscles. In the summer of that year they began the first English rebellion of workers against their masters. Mr Jones points out the 'profound echoes with our current times':

...ordinary people protesting against an ill-manged, expensive war [against France] and the corruption of the super-rich who were seen to grow fat while the rest of the population were taxed through the nose; consciousness of and resentment towards the interfering presence of government in everyday life; the fear of homegrown subversive elements in society, organised in secret cells and mobilised through local communities. The Peasants' Revolt (subscription), 'History Today', June 2009

Sounds familiar? asks Mr Jones, and indeed it does. Ordinary people, in much of the developed world, are having a rough time of it. Our political system seems biased heavily in favour of those who work for government agencies, or those in big corporations who can successfully influence government. The losers are small enterprises and the public. In so many broad policy areas: finance, the physical environment, the social environment, our politicians have taken the easy option, postponed the difficult decisions, and allowed problems to grow so that they have become systemic threats.

That way of doing things cannot, in my view, continue. Unfortunately, the scenarios on offer seem about as unappealing as the rioting , looting, terror and counterterror that followed the Peasants' Revolt. If that sounds far-fetched, consider this display of extreme attitudes depicted by Paul Krugman:

Last Thursday [5 November] there was a rally outside the US Capitol to protest pending health care legislation, featuring the kinds of things we’ve grown accustomed to, including large signs showing piles of bodies at Dachau with the caption “National Socialist Healthcare.” It was grotesque — and it was also ominous. Paranoia strikes deep, 'New York Times, 9 November

One way of closing the gap between people with different views, and the yet more grievous gap between politicians and ordinary people, is to recast policy in terms of outcomes. Our current system exaggerates the impact of special interests: it is these who bankroll the political parties, and they have little interest in the longer-term concerns of wider society. Ordinary people, rightly, feel disenfranchised and either adopt extreme attitudes, become cynical, or disengage from politics altogether.

Yet most people would probably find themselves in agreement about the policy outcomes they'd like to see: universal literacy, and basic minimum levels of income, housing and health care, for instance. There would also be a surprisingly wide consensus over the need to achieve some sort of climate stability - despite the huge gulf between people on different sides of the debate about what's actually happening to the climate.

Social Policy Bonds could help to close these gaps. Where people differ is less about the outcomes we want to see, and more about the ways in which government goes about achieving them - or failing to. A Social Policy Bond regime, with its focus on outcomes that are meaningful to ordinary people, would draw more people into the policymaking process. There will always be limited resources, and under a bond regime there would still be debates about priorities and costs. Politicians would have to relinquish their power to decide on how goals are to be achieved; they would, in effect, contract that out to the market. That would generate huge efficiency gains, but it would also mean an informed, public that participates and helps determine policy. Such a public would be far less likely to engage in the scary display of extremist attitudes that occurred last week in Washington DC, or the destructive, bloody actions that occurred in England in 1381.

08 November 2009

My correspondent (see previous post) goes on to ask some further questions:

If the opportunity exists to commercialise social goals, who are the players?

Who are the players for it?

Who are the players against it?

...players for it...? Anyone sincerely interested in efficient solution of social problems. I'd have thought philanthropists or their journals would be interested, but not one has ever responded to my emails.

...players against it...? Plenty, especially government agencies. In the epilogue to my book I relate this episode: "In April 2002, I presented a paper on the bond concept to joint meeting of the Agriculture and Environment Committees at the Organisation for Economic Cooperation and Development (OECD) in Paris. ... Perhaps one of the delegates articulated the deeper feelings of those present, who were overwhelmingly government employees: ‘if this gets adopted we'll all be out of jobs!’ My OECD paper went no further. "

What would they use such platform for? How can be made sure that it does not back fire and turn into an accessory to pursue unintended/adverse goals?

I assume that philanthropists or public sector Social Policy Bond issuers would aim to achieve social and environmental goals about which there is a wide consensus. Perhaps along the lines of avoiding of catastrophe, or achieving basic minimum levels for such things as literacy, nutrition; or maxima for environmental pollution, unemployment, crime. As for the second question: I'd have to assume that (1) people or institutions would not want openly to declare themselves in favour of anti-social goals: remember the Social Policy Bond concept is entirely transparent; redemption terms are written into each bond issue and available to everyone, and (2) there is sufficient existing sanction against illegal acts. I do address the possibility of negative-but-legal actions in my book. (See link in right-hand column.)

Whose economic or political interests are supported by the securitisation of social goals, and whose big toe would it step on?

Similar answer to players for and against it, above. Also, obviously the finance industry would benefit from securitisation. I'd hope that sincere representatives of disadvantaged people or countries would be most interested in the concept.

At what point would the platform become a competition and to whom?

I envisage Social Policy Bonds would be a bit like equities: there would be competitive bidding for the bonds at flotation and at all times thereafter, but holders would have an interest in co-operating with each other to help achieve targeted social goals after purchase.

"Are there any forerunners of this concept, and if yes how did they go. What did they achieve, and what mistakes did they make?"

I don't think so. That's one reason I think Social Policy Bonds need careful trialling, discussion and refinement before they can be applied to larger issues. Sadly, this hasn't happened yet.

A correspondent asks: According to the laws of economics if there was a potential gain for private enterprise in targeting social goals, they would have addressed it by now. If the opportunity exists, what was holding back the development of such a concept until now?

A first answer of course is that the private sector does help solve social problems, largely by employing people and paying them salaries, but only as a by-product of more financially profitable activities. A more relevant answer is that most of the funds available for directly achieving social and environmental goals are appropriated from the private sector and channelled through government agencies, which have their own goals (primarily self-perpetuation), and enriching the private sector is not one of them. If government relinquished control over the allocation of some of taxpayer funds, via for instance Social Policy Bonds, then that would animate the private sector much more than the relatively paltry after-tax sums ordinary people have for solving other people's problems. In fact, these sums go to charities and NGOs, and it's generally thought they are much more efficient at solving social problems than government. Mainly, though, the private sector would have to compete with government agencies, which apart from being big, entrenched monopolies are extremely reluctant to relinquish even control of funds, let alone funds themselves, to the private sector. Once a government did start to allow the private sector access to tax revenues, by for example issuing Social Policy Bonds, then we'd see entrepreneurs take a serious interest in solving social problems.

05 November 2009

Centralised systems experiment too little. They find reasons why new proposals will fail – and mostly they are right. But market economies thrive on a continued supply of unreasonable optimism. And when, occasionally, experiments succeed, they are quickly imitated. If market economies are better at originating and diffusing new ideas, they are also better at disposing of failed ones. Honest feedback is not welcome in large bureaucracies.... John Kay, Chaotic evolution defines the market economy, 'Financial Times' 4 November

Thanks largely to over-centralisation, we are all in a position where we need the very solutions that centralisation cannot bring us. It was national governments that created and subsidised our absolute dependence on fossil fuels, for instance, and we are looking to a centralised non-solution - Kyoto - to solve the problem. Exactly the same goes for the finance sector.

These, and other, large problems require the diversity and adaptivity of markets. That means that governments are going to have to relinquish a degree of control. But they will still have vital tasks to perform, and that is where Social Policy Bonds could be valuable. Under a Social Policy Bond regime governments would articulate society's goals and raise the revenue to reward those who achieve them. Only democratic governments can do these things, and they do them very well. But governments should bow out of actually achieving these goals, and the market's 'chaotic evolution' choose the best approaches. Is it going to happen? Frankly, I think not in the foreseeable future.

The world’s largest economies have agreed to end fossil-fuel subsidies, according to a statement made at the G-20 meeting in Pittsburgh on 25th September 2009. Leaders of the G-20 committed to phasing out the controversial subsidies ‘over the medium-term,’ blaming them for encouraging wasteful consumption and undermining efforts to combat climate change. Global Subsidies Initiative

Unfortunately, according to the same source: 'the announcement did lack details. In particular there was no information offered on how subsidies would be defined or the plan would be implemented.' A similar story on a larger scale is told by Simon Johnson, in 'the Atlantic':

recovery [in the US] will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time. The Quiet Coup, 'The Atlantic', May

It comes down to attacking the vested interests, who have become powerful enough, thanks to taxpayer funding, to resist the withdrawal of their favourable treatment. An essential first step, and one that is built into the Social Policy Bond idea, is to make policy transparent. It's quite possible that voters in a democracy would vote to sacrifice hospitals and schools to further enrich huge oil corporations or enormously wealthy bankers, so why not give us the choice? Or at least make what's going on comprehensible to outsiders. Simon Johnson again:

As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand.

Government and big business versus ordinary people. A familiar match. What chance have we got?

03 November 2009

As policymaking becomes ever more remote from the people it's supposed to benefit, it's salutary to recall that it wasn't always like that:

As Kim Phillips-Fein recounts in her new book, Invisible Hands, most Fortune 500 firms didn't have Washington public-affairs offices in 1970, but 80 percent did by 1980.... Labour's last stand, Ken Silverstein, 'Harper's Magazine', July

That's aside from the the cash directed at the political parties. I think it's quite dangerous to have such a disconnect between politicians and the public. The corporations have objectives of their own, which have more in common with each other and government agencies than they do with ordinary people. Results are a widespread disenchantment with politics in general, apathy and cynicism. Issues such as climate change become highly politicised, which reduces their chances of being addressed properly.

A Social Policy Bond regime could narrow the gap between politicians and people. It would take as its starting point desirable social and environmental outcomes. These are more amenable to public participation than the legislative game-playing at which Washington lobbyists are so adept. Greater public participation would promote public buy-in to policies, some of which will urgently need it. To take climate change again: there are disagreements as to whether it's happening and (more so) about what we should do about it if it is happening. A Climate Stability Bond issue that targeted an array of physical measurements, and human, animal and plant life indicators could reward the achievement of a stable (however defined) climate to the satisfaction of ordinary people. It would be left to the market to assess, continuously, what's actually going on with the climate, and to bear the risks of failing to get it right. That has to be better than the current approach, which, bogged down as it is by lobbyists, charlatans and politicians of all flavours is, to be frank, going nowhere.

01 November 2009

In a fascinating article, unfortunately gated, Thomas Geoghegan writes about the US economy:

First, we removed the possibility of creating real, binding contracts by allowing employers to bust the unions....Second we allowed those same employers to cancel existing contracts, virtually at will, by transferring liability from one corporate shell to another, or letting a subsidiary go into Chapter 11 and them moving to 'cancel' the contract rights....As one company after another 'reorganized' in Chapter 11 to shed contract rights, working people learned that it was not rational to count on those rights and guarantees, or even to think in future-oriented ways. Infinite Debt: How unlimited interest rates destroyed the economy, 'Harper's Magazine' (subscription), April 2009

As with the environment, so with the financial system: our policymaking is heavily slanted towards the interests of the paymasters of the political parties. And these interests are overwhelmingly narrow and short-term. They have nothing to do with the long-term goals of society: indeed, they militate against long-term interests.

Rather than allocate blame for this flaw, I would advocate Social Policy Bonds as a possible solution. About policy objectives, there is a wider consensus than about the means of achieving them. Current policymaking centres on institutional structures, spending allocations, and government's necessarily limited thoughts about how best to manage problems. In contrast, a Social Policy Bond regime would subordinate all activities to society's targeted outcomes. These would be broad, and long term in nature. Stability of objectives would be one of the features of a bond regime that would make it more efficient than the current system; it would also be an end in itself; people would have a clearer idea about what society is aiming for, and what sorts of behaviour will be rewarded. As for the current system, as Mr Geoghegan says: 'No wonder people in our country began to live for the moment and take out loans and start running up debts.'

26 October 2009

if we wanted to be cautious - admittedly not something our present rulers have been much good at - we'd say our real national debt is now in the range £7-8 trillion. Or around £300 grand for every single household. Wat Tyler, Latest on Real National Debt, 19 October

That works out at slightly more than £100000 per person. When people point out to me some of the difficulties of a Social Policy Bond regime, my response is simple: such a regime would by no means be easy to implement, but it would be better than the current system. One of the difficulties of a bond regime would be in trying to anticipate and target for elimination, all such negatives as plundering the future, whether by building up debt, or destroying the physical environment. Surely, I'm asked, we'd simply transfer problems to unforeseeable policy areas? A first answer then would be that the current system doesn't even attempt to address such concerns. There's very little, for instance, environmental accounting, and we all know now that there's very little account taken of the financial needs of future generations. The current system relies on postponing problems for at least as long as it takes a new set of politicians to take over, during which time they accumulate and their effects become catastrophic.

How could a Social Policy Bond regime be worse? It could actually be a lot better. We couldn't foresee, 50 years ago, the shape of future environmental catastrophes (the ozone hole, for instance, or climate change). But if Social Policy Bonds were around then, we could have issued something like Disaster Prevention Bonds, that would have given incentives for people to avoid all the impacts on humans of all catastrophes, however caused. People who undertook research into the long-term impacts of CFCs, or fossil fuel burning could have expected to receive additional funding from holders of Disaster Prevention Bonds. By focusing on outcomes, rather than their causes, Social Policy Bonds issued now could do a lot to prevent the building up of all disasters, environmental, financial or social, even if their full scale would not be apparent for decades to come.

21 October 2009

neither Churchill nor any other British leader could have had any realistic conception of how that goal [victory] would be achieved. Even if the Germans failed to invade Britain, a British invasion of Europe without overwhelming assistance and support was inconceivable. Churchill understood that American participation in the war was a precondition but had no means, and no plan, for bringing this about. The events that changed the direction of the war – the failed German attack on Russia and the Japanese bombing of Pearl Harbor – were neither predictable nor predicted. ... Maintain a clear sense of long-term objectives but acknowledge the limits on your day-to-day actions. The gravest errors in the financial and business world are made, not by those who control or know too little, but by those who control or know less than they think. True survivors do not clutch at straws, 'Financial Times', 21 October

It's amazing what can be done if you have a clear, long-term goal in mind. Unforeseeable events are immediately interpreted in relation to that goal. One's entire attitude of mind is orientated toward achieving the goal. When our leaders' goals coincide with public benefit, then the possibilities are immense. But what happens when they don't?

Very much what we have now. Serious environmental challenges that are not being addressed. The piling up of conventional weapons and the proliferation of nuclear warheads. The subordination of global outcomes to the nutters and ideologues, whether they be 'religious' or political extremists. The drift toward financial collapse, and economic ruin. The alienation of the moderates. The continuing fraying of the social fabric.... Our politicians are letting us down: their goals, if they have them, are political survival, and the possibility of personal (or familial) enrichment. Our bureaucrats don't want to rock the boat. It seems as if our policymaking system, like our legal, or (in the US) healthcare systems, are divorced and diverging from public needs.

Unless there's an obvious, and preferably (tele)visual crisis on our hands, we don't think in terms of clear, long-term goals. A Social Policy Bond regime could change that. We could aim to address urgent, meaningful global problems such as war, climate change, or disasters of any sort. We could focus on regional conflict, or national problems such as unemployment. In all cases, a bond regime would start off with clear, transparent, meaningful long-term goals. Investors in the bonds, and the wider public, would then have a strong interest in seeing targeted objectives become outcomes.

18 October 2009

The [UK] Department for International Development (DfID) claims to be “leading the UK government’s fight against world poverty”. However, by 2011 it will have spent over £1bn of taxpayers’ money on propaganda, according to Fake Aid, a new report from International Policy Network. Recipients of this money include trade unions and other partisan political organisations in the UK. Examples include:

--£1.2 million given to the Trades Union Congress (TUC) since 2003 for activities including: lobbying, hiring new staff and a Caribbean-themed party to celebrate “International Women’s Day” in the UK. DfID also paid the TUC to hold lessons in how to apply for DfID funds.

--£300,000 to the National Union of Teachers to “enable them [teachers] to become global agents of change”. ...

Our government agencies are too removed from the world of ordinary people to attend to their stated remits. They are far more concerned with self-perpetuation. In this, they are like any other large organization. Big private sector corporations are not inherently different; there is an element of competition which helps to keep them honest, but once they have become big they often find it more profitable to manipulate government regulations, and subvert competition and free markets, than to engage with them. It's a flaw intrinsic to any large institution: government agencies, corporations, universities, trade unions etc. Perhaps it's built into our psychology: words, thinking, concepts and ideals so often screen us from reality, creating a self-perpetuating secondary reality that separates us from the truth. At the individual level, meditation, music, humour of breathing techniques can all be used to steer us back to the real world. But what to do with organizations?

Perhaps Social Policy Bonds, with their insistent emphasis on meaningful outcomes as the measure of success, are the answer. Under a bond regime, all activities would be subordinated to social and environmental goals. The bonds would build the need for efficiency in achieving stated outcomes into an organization's everyday thinking, as well as longer-term projects. Organizational thinking then would become exactly congruent with societal thinking. The DfID grants described above, and far more wasteful expenditures, would be unthinkable under a bond regime. Bondholders who engaged in inefficient or corrupt spending would quickly find themselves outbid for their bonds by more efficient operators. And 'efficiency' in a Social Policy Bond regime means efficiency in achieving social goals - not simply in managing to keep an organization going.

14 October 2009

Two podcasts from the Cato Institute, the Criminalization of (Almost) Everything, and How American Health Care Killed My Father, go a long way in showing how far removed our legal and healthcare systems are from the interests of ordinary people. The costs, financial and human, are huge; the waste extraordinary. Unfortunately, efforts to re-orientate the systems in piecemeal fashion are also likely to be very costly. As well, they'll require more regulation and more government intervention. The problem is one of capture by vested interests, including government agencies; nothing is changing there, so the divergence between the goals of each system and the public is likely to continue.

Social Policy Bonds are a meta-system. If any current correctional or healthcare (or education, or environmental, or whatever) system were actually efficient and meeting defined needs, then under a Social Policy Bond regime little would change. But even if the starting point were the same, you would not get, under a bond regime, the gradual evolution of systems to serve the service-supplying institutions and other vested interests rather than ordinary citizens. Social Policy Bonds subordinate all activities, programmes and projects to targeted, meaningful social and environmental goals. Under the current system, it's the institutions - generally public or private sector monopolies - that call the shots. And their over-arching goal has little to do with public benefit. Quite simply, it's self-perpetuation.

10 October 2009

The Nobel Peace Prize committee has been awarded to US President Barack Obama "for his extraordinary efforts to strengthen international diplomacy and cooperation between peoples." That is, for efforts, rather than achievements. Or perhaps it's for hope? Or for who the President is, rather than what he's done? This sort of nonsense is one reason why we are in such dire trouble. We reward anything - activity, image, inputs, outputs, victimhood - anything ... except outcomes.

All institutions have as their over-riding goal that of self-perpetuation. If the Nobel people were really concerned with peace, they'd reward one of the thousands of dedicated people working selflessly and successfully in dangerous areas trying to prevent or defuse conflict. But they are more concerned about raising the profile of their committee and their lucrative, ludicrous prizes. Is there any field of public life immune from celebrity worship?

09 October 2009

People nevertheless use the stockmarket as a barometer of economic health. So a rise in equity markets can be (and has been) seen by governments and central bankers as evidence that the economy is headed in the right direction. That can lead to policy mistakes, such as a lax monetary stance, and further irrational exuberance. The nature of wealth, 'The Economist', 8 October

Our economies and societies are almost too big to govern in any way other than targeting highly aggregated data. Sadly, today that is being done opaquely, unsystematically, and almost unconsciously. In sum: badly. Social Policy Bonds are not utopian, but they would be better than the current system, under which appallingly inadequate indicators (not only stockmarket indices, but things like Gross Domestic Product or house prices) are implicitly or explicitly targeted because nobody's bothered to ask: what exactly do we want?

You couldn't get away with such ineptitude - bumbling at best, corrupt at worst - under a Social Policy Bond regime, because when issuing bonds you would have to be clear right at the start about desired outcomes. Nobody would target house prices, or GDP or share prices under a Social Policy Bond regime, because these are not ends in themselves. Indeed, the confusion between ends and means at the highest levels of policymaking probably explains much about why we may well be heading for social, environmental and economic disaster.

08 October 2009

One study, published in the prestigious journal Science, forecast that, by 2048, all commercial fish stocks will have “collapsed,” meaning that they will be generating 10 percent or less of their peak catches. ....There is no need for an end to fish, or to fishing for that matter. But there is an urgent need for governments to free themselves from the fishing-industrial complex ..., to stop subsidizing the fishing-industrial complex and awarding it fishing rights, when it should in fact pay for the privilege to fish. Daniel Pauly, Aquacalypse Now, 'The New Republic', 28 September

Yes, a vital first step, and one that we seem incapable of taking in agriculture as well as fisheries, is to stop subsidising environmental destruction. That's necessary, but hardly sufficient. Rejigging the incentives is crucial, as Mr Pauly suggests. But if, as Mr Pauly also says, '[t]he truth is that governments are the only entities that can prevent the end of fish,' then we are in a sorry state indeed (as we are when dealing with other urgent global challenges - see my previous post, about climate change). Government's incentives are different from those of the people they represent, and they are certainly different from the wider interests of the world's human population.

So how would Social Policy Bonds try to avert the impending collapse of world fisheries? First: stipulate a goal. Governments are more likely to agree on a desirable outcome, than they are the means of reaching it. And ordinary people are more likely to get involved when policy is seen to be about meaningful outcomes than about surreptitiously subsidising favoured interest groups. So we could expect that national governments, influenced by genuine public participation, will collectively decide that the survival of the world's fisheries are a worthwhile goal. The definition will be subject to negotiation and fine tuning of course. Most likely 'survival' would include an array of stock and flow variables that would have to fall into stipulated ranges for the target to be deemed met. But once the goal has been defined, governments, under the auspices of some global body, would undertake to redeem the 'Fisheries Survival Bonds' that they back, once the target had been met and sustained for a lengthy period.

The effect would be to generate financial incentives for people to take care of the world's fisheries. Of course there would be difficulties with this approach. But I'd expect they'd be mostly semantic (what is 'a fishery'? 'what is survival?') and technical (how do we measure the health of a fishery?) and therefore solvable. What's clear is that the current course is heading for calamity. Has anyone got any better idea?

07 October 2009

Talking to friends attending the United Nations climate change talks being held in Bangkok it's clear that any outcome will be political: representation is largely of nation states, by nation states. Influencing national governments are business people on the one side, who argue that any effective disciplines will undermine the economy; and people whose highest priority is the environment, for whom drastic reductions in greenhouse gas emissions are a necessary, but not sufficient, way of avoiding global catastrophe.

I am in the comfortable intellectual position of being able to accommodate the wishes of both sides. By issuing Climate Stability Bonds, we shouldn't need to take a position on (a) whether catastrophic climate change is happening, or (b) what is causing it if it is happening, or (c) how best to deal with it, whatever is going on. Issuers of Climate Stability Bonds would only need to define objectively the boundaries of acceptable climate, impacts of climate, or rate of change of climate. They then need issue bonds redeemable for a fixed sum only when the array of stipulated climate variables fall within their ranges for a sustained period of time. Everything else would be left to potential and actual investors in the bonds.

If climate change is not actually happening (as some still believe), then the cost to governments of achieving climate stability will be minimal. They would issue bonds that would fetch a high prices, relative to their redemption price, on the open market. If it is happening, then investors in the bonds would be powerfully motivated to stop it. They might well choose to cut back on greenhouse gas emissions, but even if - as with Kyoto - that is their only solution, they would go about it more efficiently than the cumbersome, inefficient and divisive way that we are currently pursuing. More likely they would research, explore and implement all sorts of ways of reducing climate instability: their investigations would be impartial as between country or method. Their projects would be entirely subordinated to results, and these would be entirely defined by how much climate instability they would achieve per dollar spent. There would be all sorts of costs to taxpayers and consumers; but under a bond regime, in stark contrast to the current system, these would be minimised. And the costs of failure would be borne not by taxpayers, but by bondholders.

04 October 2009

A more innovative idea, perhaps, is the “social impact bond”, the brainchild of Social Finance. The idea is to attract private capital into solving a deep-rooted problem that is soaking up public money. Take, for example, reoffending by released prisoners, which costs the British government millions of pounds a year. A social-impact bond could raise money to pay for the expansion of organisations with the expertise to reduce reoffending rates. The more money the organisations save the government, the higher the return the bond would pay investors. This goes beyond a standard public-private partnership, which is expected to provide the same service as the state, but more cheaply. The social-impact bond would reward better social outcomes and not merely cut costs. A place in society, 'The Economist', 26 September

I have emailed Social Finance to see if they are interested in the work I have done on Social Policy Bonds. I am glad that the idea of rewarding socially and environmentally beneficial outcomes, as against activities, inputs, outputs or gestures, is becoming more widely accepted. It's 20 years since I first floated the Social Policy Bond idea into the public arena - and about 19 years since I sent information about it to 'The Economist'.

02 October 2009

I've talked about evolution as against command-and-control many times. Evolution has the big advantage that it implies the termination of failed projects and programmes. This is especially important when, as in public policy, the suppliers of services are (usually) government-funded monopolies: there's no competition to ensure selection for efficiency. John Kay sums up the role of evolution in business:

Businesses are also complex systems. We tend to infer design where there was only adaptation and improvisation, and to attribute successful business outcomes to the realisation of some deliberate plan. .... Large and complex corporations not only are, but could only be, the product of incremental change and adaptation. The specific mechanisms of organisational evolution differ from those of biological evolution. But their common essential characteristic is inexact replication. Such replication is associated with a tendency to favour modifications that improve the fit between the organism and the environment. There is a better shortened explanation of the success of evolution than the survival of the fittest. It is that “evolution is smarter than you”. Evolution is the real hidden hand in business, John Kay, 'Financial Times', 30 September

Social Policy Bonds would introduce evolution into the provision of public services. Under a bond regime, government could continue to stipulate and reward the achievement of agreed social and environmental outcomes. But the bonds would, in effect, contract out the achievement of these goals to the private sector. Investors in the bonds would compete with each other to supply goal-achieving services. The more efficient they think they will be, the more they will bid for the bonds. Once holdings have been allocated on that basis, the incentives will be to co-operate with other bondholders to achieve goals as efficiently as possible. Unlike biological evolution, which has only reproductive success as its over-arching goal, Social Policy Bonds would have objectives that are, or are strongly correlated with, social and environmental wellbeing.

27 September 2009

A week ago I blogged about the widening gap between voters and the people who are supposed to represent us. 'We might well be reaching a tipping-point when we all feel it's our right - or duty - to game the system for the benefit of ourselves and our families.' For a similar view, beginning with examples from sport, read the article by Will Hutton in today's Observer:

What is dangerous is that when cheating reaches a certain mass, it becomes impossible to contain. Rules become there to be broken. Those who dive on the football field will hardly think an annulled suspension for a couple of matches for Arsenal's Eduardo sufficient deterrent not to try it themselves – and the football authorities have to be careful in their sanctions, because diving is so rife. Equally, governments find it hard to challenge the accounting industry, along with much of the financial services' so-called structured (cheating) investment operations, built around advising the rich how to avoid (and even evade) tax. Too many people have been allowed for too long to build a career on advising others how to cheat. ....

There is a change in society that has driven the growth of cheating – from sportsmanship to business ethics – over the last generation. It is not that there was some cheat-free golden age. Back in the 1960s and '70s there were sports cheats and some businesses bent the rules. However, most CEOs of public companies were like Courtaulds' Sir Arthur Knight, punctiliously filing every penny of his income and refusing "tax efficiency" schemes on principle as dodges to help the rich avoid their civic responsibilities. He strongly believed he was a privileged member of a community whose rules he wanted to respect. I know a few CEOs like him now, but it is a culture that is fast disappearing.

The problem is that the social sanctions against cheating are becoming ever harder to operate as communities disintegrate. ....

The outstripping of the top 0.1% from the rest – in sport and business alike – has undermined the core belief in reciprocity on which association and rule-keeping depends. If the top does not need the approval of others – because the distance between us in income, wealth and status has grown so vast – then we cannot make them feel the harm that they do. They do not feel the consequences of not paying tax, rigging markets or bending the rules. They can behave unfairly without consequence. The leaders set the tone; the rest follow and so cheating becomes the norm. We now live in a society so cynical that cheating has become the norm, 'The Observer', 27 September

As I said in my post, the end-point of widespread cheating is not a pretty sight, but we are moving toward it so long as the ends of politicians are different from the ends of ordinary people. And unfortunately, they seem to be both wide and diverging.

Social Policy Bonds cannot, themselves, rebuild communities - not immediately anyway. But they could be a way of bridging the gap between politicians and public. By focusing political debate on outcomes, rather than process, spending or activity, they could boost public participation in the policymaking process. Under a bond regime it would be more difficult for large corporations or government agencies to influence or dictate the direction of policy. The distinction between leaders and the rest of us would diminish.

26 September 2009

Kyoto’s approach has not obviously paid off. Global carbon-dioxide emissions have grown by 25% since the protocol was adopted in 1997. That is partly because the treaty left out big emissions sources such as deforestation ..., but also because potential participants were put off by the idea of internationally binding commitments. Avoiding a crash at Copenhagen, 'Economist', 26 September

Quite. There are no meaningful incentives actually to comply with Kyoto. All the costs are upfront and obvious; all the benefits well into the future, and diffuse. The fact is that if we want to cut emissions, we have to provide incentives to cut emissions. I'd go further: if we want to reduce climate instability (or the damage done by climate instability) then we have to provide incentives to reduce climate instability. All the portentous talk and well-intentioned but meaningless declarations of intent by the world's top politicians will not alter these facts.

21 September 2009

Colin Thubron quotes 'Shamil', an inhabitant of Severbaikalk, at the northern tip of Lake Baikal:

Young people don't feel connected with this country, because its system isn't ours. It's an old people's system. It comes from another time. So we'll go to America, or anywhere that will free us. It's not that we don't love Russia, it's just that we have to live properly. We're young men born into an old man's world. Colin Thubron, In Siberia (page 151)

Old people as individuals probably do feel some responsibility for their legacy. But old people collectively, acting politically, are different. They are bequeathing a world in which environmental challenges are addressed, if at all, when it's too late to do much about them. Similarly for man-made challenges, such as the risk of nuclear catastrophe. The systems supposed to solve global problems, and many national problems, have been given over to organizations that take an old-fashioned view of problem-solving; a command-and-control paradigm that relies on top-down identification of the causes of a problems, and the hand-picking of the most politically correct solutions. It is in that sense that we are all Siberians.

A Social Policy Bond regime would be different. The identification of causes of problems would be contracted out to investors in tradable bonds, which become redeemable for a large sum only when the targeted problem has been solved. No special political caste, or priesthood, would choose how to solve the problem; that would be left to powerfully motivated bondholders, or their competitors in the bond market. In such a way, failed solutions would be swiftly terminated, rather than, as now, continued indefinitely to save political face or to prolong the life of redundant, but politically powerful, vested interests. A Social Policy Bond regime would be a young person's system, in the sense that it would reward efficiency and success rather than seniority and control.

18 September 2009

Medical reform has been attempted before, and the outcome can be foretold with some accuracy: efforts at reform will fail because any meaningful reform would be financially damaging to powerful vested interests, and so national bankruptcy will have to be an essential part of the work-out. Feelings of the electorate on the matter are irrelevant.

Just as we have a medical system that is not really designed to care for the sick, we have a government that is not equipped to fix actual crises. What our government is good at is something else entirely: effecting the appearance of action, while leaving the actual reform behind in a diabolical labyrinth of ingenious legislative maneuvers.

The cynicism bodes ill but is quite justifiable. The gulf between voters and the people supposed to represent us is is wide and growing. We might well be reaching a tipping-point when we all feel it's our right - or duty - to game the system for the benefit of ourselves and our families.

It might be time to look at another way of formulating policy. The current way is obscure, complex and legalistic. It's far too arcane, time-consuming and open to manipulation to serve ordinary people.

Social Policy Bonds could be the answer. A bond regime would target outcomes that are meaningful to all members of society. All activities, research, programmes and initiatives would be devoted to achieving these outcomes at least cost to the taxpayer. Apart from the huge benefit of greater efficiency, Social Policy Bonds would be transparent. If the aim were to subsidise or buy off medical insurance companies, for example, that would have to be openly stated when the redemption terms for the bonds are drafted. Even US lawyers and lobbyists might find it irksome to insert such terms into a list of otherwise socially beneficial policy goals.

What's the alternative? Societies in which extracting whatever one can get away with for oneself and one's family are not pretty. TheordoreDalrymple writes about his experiences in Rhodesia:

The black doctors who earned the same salary as we whites could not achieve the same standard of living for a very simple reason: they had an immense number of social obligations. They were expected to provide for an ever-expanding circle of family members and people from their village, tribe, and province. An income that allowed a white to live like a lord scarcely raised a black above the level of his family. Mere equality of salary, therefore, was quite insufficient to procure for them the standard of living that they saw the whites had and that it was only human nature for them to believe themselves entitled to, on account of the superior talent that had allowed them to raise themselves above their fellows.

These obligations also explain the fact, often disdainfully remarked upon by former colonials, that when Africans moved into the beautiful villas of their former colonial masters, the houses swiftly degenerated into a species of superior, more spacious slum. The degeneration of colonial villas had nothing to do with the intellectual inability of Africans to maintain them. Rather, the fortunate inheritor of such a villa was soon overwhelmed by relatives and others who had a social claim upon him. They brought even their goats with them, and one goat can undo in an afternoon what it has taken decades to establish.Out of Africa, 'The American Conservative', 16 January 2006

Follow by Email

Search this blog

Social Policy Bonds

See the Social Policy Bonds website for overviews and links to articles, papers, news and more about Social Policy Bonds. Click on the image below to download a 2400-word article, published by the Institute of Economic Affairs, London.

Social Policy Bonds in 2400 words

Download pdf

Social Policy Bonds in the media

9 October 2015: An article by Greg Bearup on the genesis of the Social Policy Bond idea, and application of a version of it in Australia appears in the Weekend Australian Magazine. (The article can also be downloaded as a pdf from here.)

3 May 2012: An audio talk by Nobel Prize winner Professor Robert Shiller at the London School of Economics, in which Social Policy Bonds are briefly mentioned, is available here.